By order of the Fifth Circuit Court of Appeals, PredictIt and its co-plaintiffs will have their case heard in District Court, and the political futures market may continue to operate until it concludes. The Fifth Circuit panel issued the decision on July 21 following a split 2-1 vote. Judge Stuart Duncan penned the majority opinion, with Judge James Ho concurring and Judge James Graves dissenting.
The decision comes immediately on the heels of a last-ditch attempt by the Commodity Futures Trading Commission (CFTC) to persuade the court to change its mind. The CFTC is the defendant in the case and pointed to what it felt was a precedent the Supreme Court recently set in United States v. Texas.
Judges Duncan and Ho signaled quite early in the proceedings that they were likely to side with PredictIt. Both were appointees of former President Donald Trump, whose goals included weakening the powers of the CFTC.
PredictIt operates like a commodities exchange, so it falls under the CFTC’s purview. However, the “commodities” in question are effectively wagers on whether or not certain political events happen, such as a particular candidate winning an election.
The CFTC does not ordinarily authorize such exchanges. However, it granted the Victoria University of Wellington a promise not to intervene with such an exchange if it was for research purposes. The idea is that a crowd of investors, following their perceived financial interest, are better predictors of political outcomes than individual experts. On several occasions, that has proven to be the case.
However, in August 2022, the CFTC withdrew its letter, putting the site’s future in jeopardy. A lawsuit by PredictIt and several other plaintiffs followed, notably not including Victoria University itself.
Back to Square One, But With the Clock Paused
The case began badly for PredictIt and its co-plaintiffs, as the District Court for the Western District of Texas ignored the request for an injunction against the CFTC. However, the Fifth Circuit had determined that the District Court erred in doing so and has remanded the case to the District Court with instructions to enter a preliminary injunction before proceeding with the case.
The Fifth Circuit’s decision is a significant win for PredictIt. However, it’s not a complete victory. It only means that the case begins anew, from the bottom. What’s most important, however, is that the preliminary injunction will allow PredictIt to continue operating until the case concludes.
When the CFTC first withdrew the no-action letter, it recommended PredictIt cease operations by Feb. 15, 2023. Many of the market’s contracts would still have been open at that time, and it was unclear how PredictIt should have closed out those positions with the political events in question still unresolved.
Market distortions and user anxieties were the predictable results. These were among the injuries the plaintiffs pointed to in arguing the merits of their case.
The injunction means that this deadline – which has already passed – will not apply, nor will any other. The CFTC will be unable to take action against PredictIt while the case plays out. That will be welcome news for everyone still trading on the exchange because the proceedings may take a long time. Whatever the outcome at District Court, it seems likely that the case will end up back in the Fifth Circuit on appeal by the losing party.
Though the road ahead is long, to the PredictIt plaintiffs, the Fifth Circuit decision is a big win. John Phillips, CEO and co-founder of Aristotle and PredictIt, told Bonus:
This is a sweeping victory for prediction markets like PredictIt and those who find value in the insights they provide. One of the highest courts in the country agrees that in 2014 PredictIt was issued a license to operate, and the CFTC’s attempts to take that away were unjustified.
Points of Agreement, Disagreement
Although Judge Graves dissented, he agreed with his colleagues on at least one point. Specifically, he did not accept the CFTC’s argument that its decision to retract its August 2022 letter and issue a new one rendered the case moot.
However, Graves argues that he would not issue an injunction because the plaintiffs, in his view, are unlikely to win the case. He points out that courts should only grant a preliminary injunction when four things are true:
- The plaintiffs have a “substantial likelihood” of winning,
- There is a “substantial threat” of irreparable injury without an injunction,
- That injury outweighs the injury the injunction itself inflicts on the other party, and
- The injunction isn’t against the public interest.
Judge Graves’ dissent indicates he feels the reason they’re unlikely to succeed is that no-action letters don’t carry enough weight for courts to intervene in their issuance or retraction. In his words:
I have not come across any instance where a court has ruled that a “no-action letter” constitutes a final action taken by the agency. Tellingly, the majority cites no such case. Contrarily, no-action letters have been regularly found to be non-binding and devoid of legal authority, precluding their review.
On that point, Judge Ho actually agrees with Graves:
Plaintiffs’ theory of final agency action admittedly conflicts with the precedents of our sister circuits. To my knowledge, no circuit has held that a no-action letter or its withdrawal is sufficient to constitute “final agency action” under the Administrative Procedure Act. And some have held the opposite.
He doesn’t see this as dooming the case, but his concurrence is tepid, suggesting that a firm ruling on that issue requires a trial:
That said, we need not reach a definitive conclusion on this issue at this time. As detailed in the majority opinion, the issues presented in this case are sufficiently close that Plaintiffs have demonstrated a substantial likelihood of success[.] ‘The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held.’
On balance, then, it appears that PredictIt has won the battle but still faces an uphill fight if it hopes to win the war.